The Full Court of the Federal Court of Australia found against the Australian competition regulator, the Australian Competition and Consumer Commission (ACCC), in two important price-fixing appeals on 31 July.
Both cases involved distribution and agency arrangements. One case related to air travel and the other to mortgage lending.
The question in each case was whether an arrangement between the airline and its agent, or the bank and its agent, could amount to price-fixing. That, in turn, depended on whether the airline or bank could be said to be in competition with its agents.
The cases essentially confirm that there is unlikely to be a price-fixing concern when a distributor is selling a product on behalf of the manufacturer/supplier as a true agent. Where the distributor is selling on behalf of the manufacturer/supplier then the distributor will not be in competition with the manufacturer/supplier (unless the distributor also sells competing brands in its own right).
There will be a greater competition law risk, however, where the distributor is a reseller (including a situation where the distributor while termed an “agent” is not a true agent in the sense of selling the goods on behalf of the manufacturer/supplier).
The extent of that risk will be affected by the passing of the Commerce (Cartels and Other Matters) Bill which, among other things, will introduce an exemption to the prohibition on price-fixing known as the vertical supply contract exemption.
Flight Centre Ltd v ACCC  FCAFC 104, concerned a travel agency which sold international airline tickets as agent for airlines. ACCC v ANZ Banking Group Ltd  FCAFC 103, concerned the relationship between the ANZ and a mortgage broker in which the mortgage broker acted as agent in facilitating customers taking out loans from the ANZ.
In both cases the appeal court held that there was no price-fixing because the airline or bank was not relevantly “in competition” with its agent.
Under both Australian and New Zealand competition law, to establish price-fixing it is necessary to show an arrangement to fix prices for goods or services supplied “in competition” with at least one of the other parties to the arrangement.
Flight Centre case
In the Flight Centre case, Flight Centre was concerned about airlines offering fares directly to customers at prices less than prices that were accessible to Flight Centre as agent.
In response, it attempted to induce airlines to make a contract or arrangement that any fare that the airline offered directly to customers would be available to Flight Centre and would be sold by the airline at a total price no less than the amount the Flight Centre would be required to remit to the airline if Flight Centre sold the fare plus a commission.
At first instance, the Federal Court accepted the ACCC’s argument that this amounted to price-fixing. It imposed an $11 million pecuniary penalty on Flight Centre for what was held to be attempted price-fixing conduct.
On appeal, the Full Court was critical of the original finding that there was a market for distribution and booking services saying that the primary judge’s analysis was artificial and lacked commercial reality. The Full Court held that there was, in fact, no separate market for the supply of distribution and booking services. As a result, Flight Centre and the airlines did not compete in any such market.
In relation to booking services provided to consumers, the Full Court held that these services were in reality just part and parcel of the supply of the international air travel itself.
By way of analogy, the Full Court referred to the sale of a motor vehicle. It would be artificial to say that the transaction included not only the supply of a motor vehicle but also the supply of availability advice and purchase facilitation services (such as completion of paperwork to transfer registration of the vehicle). It would be even more artificial to suggest that the supply of such advice and facilitation services took place in a separate market from the market for the supply of motor vehicles.
The Full Court also noted that Flight Centre did not supply booking services to consumers. Any such services provided to consumers by Flight Centre were provided on behalf of the airlines as agent. Therefore there could be no market for the supply of booking services to consumers in which Flight Centre competed with the airlines.
Competition, rather than agency
The Full Court did say that the existence of an agency relationship between two parties does not always mean that those parties cannot be in competition with each other for the purposes of the prohibition on price-fixing. Each case must be considered on its own facts.
If the so-called agent was, in fact, no more than a distributor or re-seller of the other party’s product, there may well be competition between the parties in relation to the supply of the product.
However if the agent has the power and authority to sell the product for and on behalf of the principal then it was less likely that the agent could be considered to compete with its principal in relation to the supply of products within the scope of the agency agreement.
At first instance the primary judge had found that Flight Centre was competitive or rivalrous with the airlines. Airlines selling direct to the public (also referred to in the judgment as “cutting out the middle man”) was a commercial concern for Flight Centre.
The Full Court held that the primary judge had erred because he transferred the competition that existed in the market for the supply of air services into a non-existent market – a market for distribution and booking services.
The Full Court said: “That supposed market was in fact an artificial construct that did not truly reflect the commercial reality of the relevant commercial relationship and dealings.”
The Full Court held that the alleged attempted price-fixing occurred in the market for the supply of air travel. That was a market in which Flight Centre was agent for, and did not relevantly compete with, the airlines. Accordingly, the conduct could not amount to price-fixing.
The Full Court also took a similar approach in the ANZ case.
In the ANZ case, the bank offered mortgage loans either directly or through mortgage brokers. A particular broker promoted a mortgage refund offer to customers which involved the rebate to customers of part or all of the commissions paid by ANZ to the brokers.
ANZ required the broker to agree that the maximum refund that could be provided to the customer in relation to an ANZ loan product was to be no more than the amount of the ANZ loan approval fee. That would allow the ANZ to match the rebate if it chose to waive its loan approval fee.
The ACCC contended that this agreement amounted to price-fixing in an alleged market for the supply of loan arrangement services to consumers.
The judge at first instance found that there was no separate market for loan arrangement services. Assistance and advice provided by ANZ employees to customers were part of the process of having a customer sign up for an ANZ loan. They were not properly characterised as also involving the provision of services to customers in a separate loan arrangement services market.
The Full Court upheld this conclusion and regarded it as compelling. The Full Court then stated that it followed that ANZ did not relevantly compete with independent mortgage brokers. Accordingly the ACCC’s claim of price-fixing must fail.
The Full Court was critical of the suggested separate loan arrangement services market. Similar to its view in relation to the suggested distribution and booking services market in the Flight Centre case, the Full Court regarded the suggested loan arrangement services market as an artificial construct which was not consistent with commercial reality.
The Full Court did observe that the outcome of the ANZ case did not necessarily mean that there could never be a case where a manufacturer (or product originator) which has its own distribution division was held to be in competition with external distribution channels in the market for the supply of the particular product.
What conclusions can be drawn from the outcome of these two appeals as to the treatment of distribution arrangements for competition law purposes?
The first scenario is where the form of distribution arrangement involves a distributor selling the product as agent on behalf of the principal, and the distributor does not participate in the market in its own right. In this scenario the distributor is likely to be held to not be in competition with the principal even where the principal also sells to customers direct.
In those circumstances, the principal and the distributor can agree the price at which the distributor sells the product as agent on behalf of the principal. They can also agree on the price at which the principal itself separately sells the product directly to customers.
The second scenario also involves an agency agreement between principal and distributor, but adds the complication that the distributor in its own right (outside the agency agreement) also sells another competing brand of the product.
In such a situation the distributor would be a competitor with the principal in the market for the sale of the product. Accordingly the principal and distributor would not be able to agree on the prices they each charged.
The third scenario is where the distributor is simply a reseller for a manufacturer and purchases the product and resells it in its own name.
In this scenario, if the manufacturer also sells the product directly to customers then the distributor and manufacturer are likely to be in competition with each other.
In that situation there will be a very real risk of falling foul of the price-fixing prohibition if the manufacturer seeks to control the resale price of the distributor or if the distributor seeks to control the price charged by the manufacturer directly to customers. That will still be the case even if the distributor is described as an “agent” (but is not a true agent in the sense of selling on behalf of the manufacturer).
New NZ legislation
When the Commerce (Cartels and Other Matters) Bill comes into force, this third scenario will be affected by the proposed vertical supply contract exemption. That exemption will permit some provisions in contracts between a supplier of goods or services and a customer which might otherwise have amounted to price-fixing.
The vertical supply contract exemption will apply where the contractual provision “relates to” the supply of goods or services by the supplier to the customer and the provision does not have the dominant purpose of lessening competition between the supplier and the customer. (See further “Distribution agreements and the new cartel laws” by John Land, LawTalk 852, 10 October 2014, page 33.)
The recent decisions of the Full Federal Court are helpful in clarifying that that a distributor that sells a product on behalf of a principal as agent is unlikely to be regarded as “in competition” with the principal for the purpose of price-fixing law.
John Land is a competition law specialist and commercial litigator at Bankside Chambers in Auckland. Formerly a partner of Kensington Swan for 20 years, he can be contacted on 09 379 1513 or at email@example.com.